SHINGHAL J. - This is a consolidated reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922 (Act 11 of 1922), hereinafter called the 'Act', at the instance of the assessee, Messrs. Seth Pushalal Mansinghka Private Limited, Bhilwara. The question which has been referred for our consideration on the reference is as follows :
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to any rebate under the Part B States (Taxation Concessions) Order in respect of its income from the mining business for the assessment years 1950-51 and 1951-52 ?'
The assessee is a private limited company with its mines, factory and head office at Bhilwara in Rajasthan, and was incorporated as a company in the former State of Udaipur on 12th November, 1946. The assessee carried on mining business at Bhilwara and was engaged in the cutting, processing, sorting and packing of mica which was sent almost entirely by railway to Kodarma and Girdih villages in Part A and Part C States, as they then were. The assessee followed the mercantile method of accounting and the assessment years in question are 1950-51 and 1951-52, the corresponding previous years being the years from 2nd November, 1948, to 21st October, 1949, and 22nd October, 1949, to 9th November, 1950, respectively. The total sale proceeds of the assessee during the two assessment years amounted to Rs. 19,77,544 and the assessee tendered bills to the local branch of the Bank of Rajasthan to the extent of Rs. 15,64,475 and received that much of the payment at Bhilwara. As Rajasthan was then a Part B State, the assessee claimed that it was entitled to the benefit of rebate under the Part B States (Taxation Concessions) Order, 1950, and that section 4(1)(a) of the Act was not applicable to its transactions. By his order dated 31st May, 1954, for the assessment year 1951-52, the Income-tax Officer held that since the railway receipts were obtained by the assessee for 'self' and were sent by the assessee through its banker to the buyers, the ownership in the goods continued to vest in the assessee until their actual delivery to the buyers, so that the title in the goods passed only at Kodarma when the delivery of the railway receipts was made by the bank on behalf of the assessee. The Income-tax Officer rejected the assessees contention that as bills to the extent of Rs. 15,64,475 had been discounted by the bank at Bhilwara, the payment to that extent should be deemed to have been received at Bhilwara. He reached that conclusion on the ground that the assessees letter dated 8th July, 1948, for the discounting of the bills was not genuine, and also because he arrived at the conclusion that, at any rate, the profits were earned by the assessee at Kodarma on the passing of the title to the buyers in respect of the consignments in question. The Income-tax Officer refused to place reliance on the statement of the banks manager, Raghuwardayal, that if the bills of exchange presented by the assessee along with the railway receipts had been dishonoured, the bank could not have debited the amount to the assessee. In reaching his conclusion, the Income-tax Officer went on to hold that the assessee must have filed the necessary discount form and that the contents of that form were sufficient to negative the managers statement to the contrary. In the alternative he also held that the mere giving of credit by way of overdraft against railway receipts was a matter of no consequence as such a facility might have been provided to the assessee because the bank in question was controlled by some of the directors of the assessee-company. A similar order was passed by the Income-tax Officer for the assessment year 1950-51. Appeals were preferred against both the orders, but were rejected by the Appellate Assistant Commissioner on 20th September, 1957, after he had made certain further inquiries from the Income-tax Officer, so that no rebate was allowed to the assessee under the Part B States (Taxation Concessions) Order. The assessee once again filed an appeal before the Income-tax Appellate Tribunal, Bombay Bench 'C', but the Tribunal also reached the conclusion that as the goods were consigned to 'self' and not to the buyers, the property in the goods did not pass to them until they took possession of the documents from the bank. The appeal was accordingly dismissed on the 18th August, 1958, and this is how the present reference has been made at the assessees request.
In order to appreciate the controversy, it is necessary to refer to some other facts which are not in dispute, so that the nature of the transactions which gave rise to the profits in respect of the two assessment years may be properly appreciated. The representatives of the buyers from Kodarma and Girdih used to visit Bhilwara, inspect the various qualities of mica which the assessee had for sale and entered into written contracts for their purchase. Four of such contracts have been placed on the record and marked as annexure 'A', for it is admitted that they fairly represent all the contracts with which we are concerned. These contracts clearly show that the buyers purchased specified qualities of mica, 'Bhilwara godown delivery', on the condition that the consignments would be sent to Kodarma or Girdih, as the case may be, and that the railway receipts would be sent 'through bank'. Then there is the further stipulation that 25 per cent. of the price would be sent by way of an advance within a weeks time, that the packing expenses would be payable by the buyers and that after the consignments left the godown, they would be entirely at the buyers risk. Apart from these written terms and conditions of the contracts, the department, as well as the Income-tax Appellate Tribunal, have recorded their further finding of fact that the assessee consigned the goods to 'self' and that the railway receipts along with the bills of exchange were presented by the assessee to the Rajasthan Bank, Bhilwara, for collection, after endorsing the railway receipts in favour of the bank. It has also been found that the bank, in its turn, endorsed the railway receipts in favour of its branches in Part A or Part C States and that the goods were delivered to the buyers only when they paid the price to the bank and obtained the railway receipts.
The question is whether, on these facts and circumstances, the property in the goods could be said to have passed to the buyers at Bhilwara, as has been claimed by the assessee, or whether it passed at Kodarma or Girdih as has been held by the department and the Income-tax Appellate Tribunal.
It has been argued by the learned counsel for the assessee that the contracts in question undoubtedly took place in the Part B State a Rajasthan and were for ascertained goods, which were in a deliverable state, and that as the contracts were unconditional, the property in the goods passed to the buyers on the dates when the contracts were made and that it was immaterial whether the time of the payment of the price or the time of the delivery of the goods was postponed. The learned counsel has based his argument on the provisions of section 20 of the Sale of Goods Act. He has further argued that a serious mistake was committed by the income-tax authorities, as well as the Income-tax Appellate Tribunal, in holding that the bank was the agent of the seller, inasmuch as the buyers themselves made it a condition of the contracts that the railway receipts would be sent through the bank. In this connection he has pointed out that the sale became complete in all respects when the railway receipts were endorsed by the assessee in the banks favour and were delivered to the bank because such an endorsement was sufficient to pass a title in favour of the bank who was the buyers agent. Further, the learned counsel has pointed out that the question whether the goods were unconditionally appropriated towards the contract at Bhilwara within the meaning of section 23 of the Sale of Goods Act has not been properly considered and appreciated and that since the appropriation was at Bhilwara, the subsequent process for the purpose of effecting actual delivery of the goods to the buyers or obtaining the price from them was of no consequence. These arguments have been supported by reference to certain decided cases and we shall have occasion to refer to them a little later. It may be mentioned here that an alternative argument has been made by the learned counsel for the assessee that, even if it was held that the sales in question took place in a Part A or Part C State, the assessee was entitled to apportionment of the profits as it has not been disputed that the mica in question was extracted, processed, sorted, packed and despatched at Bhilwara.
Now, as we have stated earlier, the assessee regularly employed the mercantitle method of accounting and there can be little doubt that, by virtue of section 13 of the Act, its income, profits and gains shall have to be computed in accordance with that method of accounting, i.e., on the basis of accrual, and not on the basis of receipt. We may in this connection refer to the well-known case of E. D. Sassoon and Company Ltd. v. Commissioner of Income-tax, in which their Lordships of the Supreme Court have laid down that income may accrue to an assessee without the actual receipt of the same so that if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later, on its being ascertained. Thus the basic conception for the accrual of income is that the assessee must have acquired a right to receive it. It does not matter if the valuation of the income is postponed or that the materialisation of the income may depend on the contingency that the making up of the accounts would show income, profits or gains. But, as is obvious, profit in a case like the present can accrue only on the transfer of property from the seller to the buyer, and, therefore, the time when the property passes from the seller to the buyer is one of considerable importance.
This brings us to the provisions of sections 18 to 25 of the Sale of Goods Act. According to section 18 thereof, property cannot pass to the buyer in the case of unascertained goods until the goods are ascertained. But it is not in dispute that the present is a case of ascertained goods. In fact, this would be obvious from the fact that, as has been mentioned, the buyers went to Bhilwara to purchase the goods and precisely specified the quality and the quantity of the various types of mica which they purchased from the assessee. It is also not in dispute that mica of the required quality was duly sorted out and was packed and consigned to Kodarma or Girdih, as the case may be. Thus, the present transactions clearly related to specific or ascertained goods. The question is when the property in respect of them could be said to have passed to the buyers. Section 19 of the Sale of Goods Act provides that, where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer 'at such time as the parties to the contract intend it to be transferred'. There is the further provision that, for the purpose of ascertaining such an intention, regard shall be had to, (i) the terms of the contract, (ii) the conduct of the parties, and (iii) the circumstances of the case. Then there is the provision in sub-section (3) of section 19 to the effect that :
'Unless a different intention appears, the rules contained in sections 22 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.'
The case of the assessee is that the sales in question fall within the purview of section 20 because there was, in each case, an unconditional contract for sale of specific goods in deliverable state and that the property in the goods accordingly passed to the buyers when the contract was made. The question is whether these could be said to be unconditional contracts within the meaning of section 20.
It has been argued by the assessees learned counsel that there is nothing in the various letters of contract marked annexure 'A' or in the other evidence on the record, which could show that this was not an unconditional contract for the sale of mica, and it is in this connection that his other argument that the bank was the agent of the buyers comes in for consideration. The learned counsel has pointed out that the Income-tax Appellate Tribunal committed a serious mistake when in paragraph 8 of its order dated 18th August, 1958, it referred to the bankers as the bankers of the assessee, and it has further been argued that it was only natural in view of such a mistake that the Tribunals finding should have gone against the assessee. The learned counsel has further pointed out that in the letters annexure 'A' the buyers clearly stated that they had purchased the mica, that the delivery was ex-Bhilwara godown, that the consignment was to be sent to Kodarma or Girdih, that the packing charges were to be borne by the buyers and that the risk was to be entirely of the buyers as soon as the consignments left the sellers godown. These terms of the contract, according to the learned counsel, were sufficient to show that the contract was unconditional. As regards the other condition about the despatch of the railway receipts through the bank, the learned counsel has argued that the condition was imposed by the buyers and that the bank was, therefore, the buyers agent and that by endorsing the railway receipts in favour of the bank, the assessee passed on the title in the goods to the buyers agent. For this last argument, learned counsel has placed reliance on Dolatram Dwarkadas v. B. B. & C. I. Railway Company, Ford Automobiles (India) Ltd. v. Delhi Motor and Engineering Co., Shamji Bhanji & Co. v. North Western Railway Co., Jalan & Sons Ltd. v. Governor-General in Council, Firm Peare Lal Gopi Nath v. E. I. R. Company, Sheo Prasad v. Dominion of India, Erachshaw Desabhai Kerawala v. Dominion of India, Bayyana Bhimayya v. Government of Andhra Pradesh, and State of Andhra Pradesh v. Kolla Sreerama Murthy.
On the other hand, it has been argued by Mr. Lodha on behalf of the department that, since the railway receipts were endorsed by the assessee in favour of the bank, the buyers could not take delivery until after the payment of the price to the bank and that it could not, therefore, be said that it was a case of an unconditional contract of sale within the meaning of section 20 of the Sale of Goods Act. The learned counsel has placed reliance on Commissioner of Income-tax v. Mysore Chromite Ltd., Commissioner of Income-tax v. P.M. Rathod & Company, Commissioner of Income-tax v. Bhopal Textiles Ltd., Mysore Glass and Enamel Works Ltd. v. Commissioner of Income-tax and Mewar Textile Mills Ltd. v. Commissioner of Income-tax.
Now, it is well settled that the inference in respect of a mercantile contract is that each party will do what is 'merchantably reasonable.' So, when it was made a condition of the contract that the railway receipt would be sent through the bank, it would follow that such a term had the effect of inserting a condition in the contract of sale that the seller would deliver the railway receipt to the bank for onward transmission to the buyer, and that it would be the bank which would secure a clearance of the transaction. Such a provision obviously had the effect of providing that the bank would deliver the railway receipt to the buyer only against payment of its value, or, in other words, on the honouring of the bill of exchange by the buyer. We are, therefore, inclined to the view that the parties to the contact virtually stipulated, as an important condition for the sale of the goods in question, that the property in the goods would pass to the buyer on payment of the value thereof, and not otherwise. It cannot, therefore, be said that the provision for the sending of the railway receipts through the bank was so innocuous or insignificant that it could be ignored and the contract held to be an unconditional contract for sale. As such, we are clearly of the opinion that this case is not covered by section 20 of the Sale of Goods Act, and that the property in the goods did not pass to the buyers when the contracts were made.
In the view which we have taken, it is really a matter of no consequence that the provision regarding the sending of the railway receipts through the bank was inserted at the request of the buyers, for the fact remains that the parties agreed to that condition as the mode for the actual delivery of the goods in pursuance of the contract for sale. Unless that condition was satisfied, there could be no question of transfer of property in the goods in favour of the buyers.
The argument that the bank became the agent of the buyers is also of no avail to the assessee for at least two other reasons. Firstly, the argument is factually untenable, for it has been found as a fact that, while delivering the railway receipts to the bank, the assessee used to make endorsements in favour of the bank, and not in favour of the buyers, so that the title in the goods passed to the bank and not to the buyers. Secondly, it has also been found as a fact that, in its turn, the bank sent the railway receipts to its own office at Kodarma or Girdih after making a further endorsement on the railway receipts in favour of its own branches there so that the bank retained the title in respect of the goods in itself and did not pass it on to the buyers until they had paid the value thereof to the bank. This would not have been the course of conduct if the bank had been the buyers agent as has been argued by the learned counsel for the assessee.
It may be mentioned here that the learned counsel tried to place reliance on the statement of Raghuber Dayal Mathur, manager of the Bhilwara branch of the bank of Rajasthan, in order to show that the bank could not, at any rate, claim any amount from the assessee even if the bill of exchange was dishonoured by the buyer or there was a loss of the goods in transit. That statement has, however, been held to be unreliable by the departmental authorities and has not been referred to by the Tribunal. We are not, therefore, disposed to take the view that the statement is reliable. Thus, there is no force in the argument that the bank was the buyers agent and that the delivery of the railway receipts to it was on behalf of the buyers and that it passed the property in the goods to them.
In this view, Commissioner of Income-tax v. Ogale Glass Works Ltd. and Commissioner of Income-tax v. Patney & Co., which have been cited by the learned counsel for the assessee, have no relevance. Those cases relate to the posting of cheques at the request of the assessee and that was why it was held that the post office became the assessees agent so that the delivery of the cheque to the post office amounted to delivery to the assessee so far as the receipt of the payment by the assessee was concerned.
An argument has also been advanced on behalf of the assessee that a serious error has been committed in drawing up the order of assessment, inasmuch as the department failed to take notice of the fact that, by making the endorsement in favour of the bank, the assessee passed on the title in respect of the goods at Bhilwara and that there was, at any rate, an unconditional appropriation of the goods there within the meaning of section 23(2) of the Sale of Goods Act. This argument also fails to convince us because the sub-section provides that where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract within the meaning of sub-section (1) of section 23. As we have already discussed above, the real arrangement between the parties was that the buyers would not get property in the goods unless they paid the price to the Rajasthan Banks branches at Kodarma or Girdih, as the case might be, against the railway receipts which had been consigned to 'self'. That being so, we are not prepared to hold that the assessee had transferred its right of disposal over the goods within the meaning of section 23(2). Section 23 of the Sale of Goods Act is thus of no avail to the assessee. Accordingly, the profits accrued to the assessee at Kodarma or Girdih, so that the assessee is not entitled to receive the benefit of the rebate under the provisions of the Part B States (Taxation Concessions) Order.
We are fortified in this view by a number of decisions of their Lordships of the Supreme Court. We shall first make a reference to commissioner of Income-tax v. Mysore Chromite Ltd. In that case the assessee placed the contracted goods on board the steamer at Madras and obtained a bill of lading in its own name, prepared a provisional invoice on the basis of the weight recorded in the bill of lading and the contract price and drew a bill of exchange on the buyers bank. The bill of exchange, together with the relative bill of lading and the provisional invoice, was then negotiated by the assessees bank at Madras and that bank forwarded the documents to its branch in London and it was that branch which presented the bill of exchange to the buyers bank at London and upon its acceptance the bill of lading and the invoice were delivered to the buyers bank. The sale price was ascertained thereafter on the arrival of the goods and after weighment and assay. On these facts, their Lordships of the Supreme Court held that upon the terms of the contracts and the course of dealings between the parties the property in the goods passed in London where the bill of lading was handed over to the buyers bank against the acceptance of the relative bill of exchange. This case was sought to be distinguished by the assessees learned counsel on the ground that it was not a case of 'ascertained goods' and that it differed from the present case also for the reason that there is an unconditional contract for the sale of the mica in this case. These so-called distinguishing features are really of no importance, for the fact remains that the view which prevailed with their Lordships was that as the bill of lading was handed over to the buyers bank against acceptance of the relative bill of exchange, the property in the goods passed in London; and that decision would amply govern the present case.
Then we come to Commissioner of Income-tax v. P.M. Rathod & Co. In that case, the goods ordered by the buyers were sent to them either by V. P. P. or by rail and, in the latter case, the railway receipts in favour of 'self' were sent through bank to be delivered to the buyers against payment of the demand draft drawn on the buyer. It was held by their Lordships of the Supreme Court that as the railway receipts could not be delivered to the buyers till the money was paid, in spite of the fact that the goods had been handed over to a common carrier, the appropriation to the contract was only conditional and that the performance was completed when the monies were paid and the railway receipts delivered in a Part A or Part C State. It has been urged before us that the case is distinguishable for the reason that there was evidence to show in that case that the assessee had advised its banker to make delivery against payment. There is no force in this contention because, as we have shown already, there was a clear condition in the present case that the railway receipts would be sent through the bank so that the parties had stipulated that the delivery of the goods would be contingent on the payment of their price.
In the case of Commissioner of Income-tax v. Bhopal Textiles Ltd., the assessee handed over the railway receipts to the bank and asked the bank not to deliver them to the buyers unless payment was received. It was held by their Lordships of the Supreme Court that the document of title to the goods remained the property of the assessee until payment for it was received and it was handed over, so that the income must be deemed to have been received by the assessee in a Part A State where the railway receipts were delivered. This case was also sought to be distinguished on the ground that there was evidence to show that the bank was the agent of the assessee and that the assessee had instructed it to deliver the railway receipts only against payment. For the reasons which we need not repeat, there is no force in this argument.
In the result, we are satisfied that, as the property in the goods passed from the assessee to the buyers in a Part A or Part C State, the assessee cannot claim a rebate under the Part B States (Taxation Concessions) Order on the profits that accrued to it on the transactions.
It has however been strenuously urged by the learned counsel for the assessee that, even when we arrive at such a conclusion, the assessee would still be entitled to claim a proportionate rebate in the income-tax as it is not disputed that the mica in question was extracted, processed, sorted, packed and despatched at Bhilwara and that the element of profit embedded in these various processes having accrued at Bhilwara, i.e., in a Part B State, the assessee is entitled to a proportionate rebate thereon as the whole of the income could not be said to have arisen in a Part A or Part C State. An objection was however raised by Mr. Lodha that such a plea was not advanced before the department or the Income-tax Appellate Tribunal and that it could not be allowed to be raised for the first time before us.
A point similar to that raised by Mr. Lodha arose for consideration in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. and, after examining the relevant provisions and the case-law, their Lordships of the Supreme Court summed up the position as follows :-
'(1) Whether a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.
Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order.'
We have gone through the order of the Tribunal in the light of these observations of their Lordships of the Supreme Court and we have no doubt that the question of apportionment of the income, profits and gains was not at all raised before it and it cannot be said to arise out of the Tribunals order. We do not, therefore, feel persuaded by the argument of the learned counsel for the assessee that we should go into it at this stage. Even otherwise there is no merit in the claim for apportionment of the income, profits and gains because we have reached the conclusion that the income, profits and gains in the present case were received or should be deemed to be received in the Part A and Part C States in question where property in the goods passed to the buyers on payment of their value. It has been laid down by their Lordships of the Supreme Court in the case of Bhopal Textiles Ltd. that, where income is deemed to have been received in British India, the assessee must be held to be liable to income-tax under section 4(1)(a) of the Act, and there would thus be no question of apportionment of the profits under the Part B States (Taxation Concessions) Order, 1950.
In the result, we would answer the question which has been referred to us in the negative. The assessee shall be liable to pay the costs - one set - of this reference to the department.
Question answered in the negative.